18 Dec 2009, Mark Pengelly, Risk magazine
Efforts by the Federal Reserve over the past year to reignite securitisation markets have been successful in some asset classes but not in others, analysts say.
The Fed's Term Asset-Backed Securities Loan Facility (Talf) seems to have restored markets for consumer asset-backed securities (ABSs), but this has not been the case for commercial mortgage-backed securities (CMBSs). Moreover, the CMBS market faces more extreme problems due to a looming wave of refinancing, analysts note.
In the months following the collapse of Lehman Brothers in September 2008, US securitisation issuance came to a standstill. In response, the Treasury and the Fed announced the creation of the Talf in late November 2008. The programme commenced in March, designed to offer cheap non-recourse funding to buyers of newly issued AAA rated ABSs. Talf-eligible collateral initially included securitisations backed by auto loans, credit cards and loans guaranteed by the US Small Business Administration.
The programme has worked for consumer ABSs, says Joseph Astorina, securitisation strategist at Barclays Capital in New York: "We're not back to where we were in 2005 and 2006, but we're definitely in a better place than at the end of 2008. The Talf has done its job as advertised in that it has got the consumer ABS market started up again."
In the year to late-December 2009, there was $128.15 billion in consumer ABS issuance across Talf-eligible asset classes. That compares with a total of $125.14 billion in 2008, according to Barclays Capital. Much of the recent issuance of consumer ABSs has not been financed with Talf loans, which Astorina believes is a good sign for the market. In October, $6.09 billion of issuance was eligible for the Talf, while another $1.63 billion was not. In November, issuance eligible for the Talf totalled $7.14 billion, while issuance not eligible for inclusion reached $6.25 billion.
Meanwhile, spreads across the consumer ABS market have tightened - to the extent some retail auto-loan ABSs have reached a point where it is no longer economical to fund securities with Talf loans, says Astorina. Spreads on three-year AAA rated prime retail auto ABSs exceeded 800 basis points towards the end of 2008. By December 10, they were at 45bp, according to Barclays Capital. Similarly, spreads on three-year AAA rated prime credit card ABSs ballooned to more than 500bp at the end of 2008. By December 10, they had compressed to 115bp.
The results of the Talf have been so positive for the consumer ABS market that some analysts argue the sector might see the launch of more diverse underlying assets in the coming year. "There are other esoteric asset classes that might start to make an appearance because with spreads so tight, players such as hedge funds are looking for newer sources of incremental yield," says Vishwanath Tirupattur, New York-based credit strategist at Morgan Stanley.
Securitisations of floor-plan loans, which are eligible for inclusion in the Talf, have come back "in a big way", he adds: "They were the last auto securitisations to come back and we expect a lot more of those next year."
The Fed extended the Talf to cover new and legacy CMBSs in June and July, respectively. But uptake among CMBS investors has been limited. By late December, there had been three new CMBS deals during 2009, representing a total of $1.5 billion, according to Morgan Stanley. One of these was Talf-eligible.
Previously, the CMBS market financed a big chunk of commercial real estate loans in the US - and $2.7 trillion of these loans are expected to come due by 2014, with the number peaking between 2010 and 2011. Although the Talf could spur more CMBS deals in early 2010, Tirupattur doesn't believe it will be enough to heal the market. "There will be some deals, but I don't think there will be enough to change the refinancing conundrum the market faces," he says.
This refinancing problem could mean many commercial real estate loans are pushed into default or have their maturities extended over the coming years. Without the re-emergence of multi-borrower conduit deals in particular, Tirupattur suggests the market's prospects are bleak.
Having been extended already by the Fed, the Talf is set to expire for existing CMBSs and consumer ABSs in March 2010. It will remain operational for newly issued CMBSs until the end of June 2010. In consumer ABSs at least, Barclays Capital's Astorina suggests the market will be able to withstand the shutdown of the Talf. "We would not say the end of the Talf would be disastrous for the market at all," he says. The outlook for CMBSs is far less certain, with Morgan Stanley's Tirupattur arguing it is doubtful the market will have recovered by the time the programme closes.
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